Saturday, January 30, 2016

Maybe China’s Growth Slowdown Is Easy to Understand

Academic economists (like me) get pessimistic about China for two big reasons:

Structural problems — basically, the country has some (definitely more than one) recognizable organizational problems that are hard to solve and likely to slow growth, and

The Middle Income Trap — basically, that most countries seem to stall at middle incomes (like Brazil), rather than cruise right through to higher incomes (like South Korea). So the odds for China just aren’t good to start with.

Andrew Batson (an economics consultant and reporter, on the ground in Hong Kong) has a different take.

I have to confess to some frustration with some of the recent commentary on China coming from academic economists. …But I think on China there is a tendency for some people to look past “simple” issues … Again, usually I’m all in favor of complex, historically nuanced explanations–but you can go too far with this stuff. Sometimes it’s really not that complicated.

He follows with a list of structural explanations which, if you’re paying attention, sound like the stuff I say in class all the time.

What I found amazing about these analyses is that they fail to even mention the most straightforward and direct explanation of why China’s growth is much slower today than it was in say, 2010 or 2007. It’s not like it’s a secret. From about 2003 to about 2010 China had the biggest construction boom of modern times and probably in all of human history. Then in 2011-12 the construction boom ended. That’s it. Really, that’s all you need to know.

…

None of the various structural reforms being debated today will do anything to change the fact that in the near term, China does not need to build a lot more housing. And that therefore business for companies related to housing construction (and there’s lots of those) will be poor.

I have to admit, I think he’s got a good point. So maybe I’ll back off on China a bit (don’t count it though). What really got me was his discussion of what critics of China think China ought to do if it actually has those structural problems:

If you think China is succumbing … the proper response is a set of carefully calibrated structural and institutional reforms. If growth ends up worse than expected, you put the blame on the government for not taking the right policy prescriptions.

I find that very convincing because it’s an argument about why my thinking about China may be weaker than I’d like to believe.* Batson is pointing out that if you think China’s government got them into this mess, then you also think they can get China out. But that contradicts the general assertion I make in class that politicians/bureaucrats … just don’t have that much control over the economy. Either they do or the don’t, but you can’t have it both ways.

* Macroeconomics is all about critical thinking skills. If you’re not introspective about how you interpret events, you’re going to have trouble in your career when you face news issues that don’t fit into your intellectual framework.